Setting up a Specialized Purpose Vehicle to Invest in Trade Receivables

In the last several weeks, several deals announcing some form of Specialized Purpose Vehicle to finance Trade Receivables has propped up on the newswire, many with fancy names like Trade MAPs, Lighthouse, or the recent launch of the Tactical Opportunities Fund in 2012 by the Blackstone Private Equity Group with the backing from the State of New Jersey and California pension fund CalPERS.

It all sounds so sexy. In a world where banks are challenged to provide lending to corporates due to more stringent capital rules and leverage restrictions, many are appealing to alternative Investors.

The chief reason non banks are a new source of capital for banks is that they do not have the same capital issues due to the nature of their respective industry.

While these deals are quite interesting, and setting up a Specialized Purpose Vehicle is neither easy nor cheap (note: it took Citibank and Santander almost 5 years to launch the Trade Maps program), the one continued challenge in these deals is they remain Opaque and Complex for investors to understand.

Reading through the Prospectus on these deals is time consuming, full of jargon, complex and not for the faint of heart. While Pension Funds and others sitting on huge amounts of capital can afford bright MBAs to look at these deals, you can bet the devil is in the details.

Citi and Santander’s Trade Maps program wraps together trade finance loans into notes that can be purchased and resold by investors. The US$1bn of three-year asset- backed securities are rated by Fitch and Standard & Poor and 87% are in a low risk AAA rated tranche. These notes typically catch Libor + 100bps or less.

BNP’s recent deal is both tiny and misleading. The Asset Manager is their own subsidiary and the deal is tiny by securitization standards- $130M